<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2000
Commission File Number 1-8803
MATERIAL SCIENCES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-2673173
(State or other jurisdiction (IRS employer identification number)
of incorporation or organization)
2200 East Pratt Boulevard
Elk Grove Village, Illinois 60007
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (847) 439-8270
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______________
---------------
As of January 11, 2001, there were outstanding 14,285,650 shares of common
stock, $.02 par value.
<PAGE>
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended November 30, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
(a) Financial statements of Material Sciences Corporation and Subsidiaries
2
<PAGE>
Consolidated Statements of Income (Unaudited)
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
(In thousands, except per share data) 2000 1999 2000 1999
--------------------------------------------------------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales (1) $ 120,117 $ 125,441 $ 374,972 $ 382,900
Cost of Sales 102,035 99,671 310,700 306,109
--------- --------- --------- ---------
Gross Profit $ 18,082 $ 25,770 $ 64,272 $ 76,791
Selling, General and Administrative Expenses 17,003 15,903 51,491 47,440
--------- --------- --------- ---------
Income from Operations $ 1,079 $ 9,867 $ 12,781 $ 29,351
--------- --------- --------- ---------
Other (Income) and Expense:
Interest Expense, Net $ 2,467 $ 2,080 $ 7,183 $ 6,874
Equity in Results of Joint Ventures 73 477 211 1,582
Other, Net 126 66 165 209
--------- --------- --------- ---------
Total Other Expense, Net $ 2,666 $ 2,623 $ 7,559 $ 8,665
--------- --------- --------- ---------
Income (Loss) Before Provision (Benefit) for Income Taxes $ (1,587) $ 7,244 $ 5,222 $ 20,686
Provision (Benefit) for Income Taxes (1,109) 2,680 1,410 7,654
--------- --------- --------- ---------
Net Income (Loss) $ (478) $ 4,564 $ 3,812 $ 13,032
========= ========= ========= =========
Basic Net Income (Loss) Per Share $ (0.04) $ 0.30 $ 0.27 $ 0.86
========= ========= ========= =========
Diluted Net Income (Loss) Per Share $ (0.04) $ 0.30 $ 0.27 $ 0.85
========= ========= ========= =========
Weighted Average Number of Common Shares Outstanding
Used for Basic Net Income (Loss) Per Share 13,635 15,054 14,121 15,144
Dilutive Common Stock Options - 157 261 255
--------- --------- --------- ---------
Weighted Average Number of Common Shares Outstanding
Plus Dilutive Common Stock Options 13,635 15,211 14,382 15,399
========= ========= ========= =========
Outstanding Common Stock Options Having No Dilutive Effect 1,249 1,222 1,245 1,259
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
November 30, February 29,
2000 2000
(In thousands) Unaudited Audited
------------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ -- $ 4,223
Receivables, Less Reserves of $5,394 and $5,067, Respectively (2) 57,747 58,331
Income Taxes Receivable 369 --
Prepaid Expenses 5,219 2,418
Inventories 69,397 60,251
Prepaid Taxes 4,209 4,209
--------- ---------
Total Current Assets $ 136,941 $ 129,432
--------- ---------
Property, Plant and Equipment $ 383,018 $ 373,519
Accumulated Depreciation and Amortization (172,833) (152,417)
--------- ---------
Net Property, Plant and Equipment $ 210,185 $ 221,102
--------- ---------
Other Assets:
Investment in Joint Ventures $ 22,896 $ 20,306
Intangible Assets, Net 22,467 23,980
Other 2,386 2,475
--------- ---------
Total Other Assets $ 47,749 $ 46,761
--------- ---------
Total Assets $ 394,875 $ 397,295
========= =========
Liabilities:
Current Liabilities:
Current Portion of Long-Term Debt $ 8,300 $ 2,688
Accounts Payable 43,385 50,667
Accrued Expenses 19,576 27,452
--------- ---------
Total Current Liabilities $ 71,261 $ 80,807
--------- ---------
Long-Term Liabilities:
Deferred Income Taxes $ 20,528 $ 21,486
Long-Term Debt, Less Current Portion 135,827 120,896
Accrued Superfund Liability 3,047 3,014
Other 11,891 12,693
--------- ---------
Total Long-Term Liabilities $ 171,293 $ 158,089
--------- ---------
Shareowners' Equity:
Preferred Stock (3) $ -- $ --
Common Stock (4) 354 347
Additional Paid-In Capital 62,511 59,164
Treasury Stock at Cost (5) (34,813) (22,074)
Retained Earnings 125,357 121,545
Accumulated Other Comprehensive Loss (6) (1,088) (583)
--------- ---------
Total Shareowners' Equity $ 152,321 $ 158,399
--------- ---------
Total Liabilities and Shareowners' Equity $ 394,875 $ 397,295
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Consolidated Statements of Cash Flows (Unaudited)
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
(In thousands) 2000 1999 2000 1999
----------------------------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows From:
Operating Activities:
Net Income (Loss) $ (478) $ 4,564 $ 3,812 $ 13,032
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 7,649 7,423 22,868 22,788
Provision (Benefit) for Deferred Income Taxes (1,173) 723 (958) 2,144
Compensatory Effect of Stock Plans 731 399 2,099 1,756
Other, Net 68 460 104 1,567
-------- -------- -------- --------
Operating Cash Flow Prior to Changes in Assets and Liabilities $ 6,797 $ 13,569 $ 27,925 $ 41,287
-------- -------- -------- --------
Changes in Assets and Liabilities:
Receivables $ 4,284 $ (1,142) $ 584 $ (4,547)
Income Taxes Receivable 161 -- (369) 968
Prepaid Expenses (497) 430 (2,801) (866)
Inventories 5,725 (2,212) (9,146) (5,588)
Accounts Payable (16,787) (3,430) (7,282) 3,081
Accrued Expenses (505) 1,762 (7,876) 374
Other, Net (319) (25) (1,128) 401
-------- -------- -------- --------
Cash Flow from Changes in Assets and Liabilities $ (7,938) $ (4,617) $(28,018) $ (6,177)
-------- -------- -------- --------
Net Cash Provided by (Used in) Operating Activities $ (1,141) $ 8,952 $ (93) $ 35,110
-------- -------- -------- --------
Investing Activities:
Capital Expenditures, Net $ (2,306) $ (3,415) $ (9,750) $(11,289)
Acquisitions, Net of Cash Acquired (176) (922) (176) (922)
Investment in Joint Ventures (825) (556) (2,801) (658)
Other (201) 69 (362) (677)
-------- -------- -------- --------
Net Cash Used in Investing Activities $ (3,508) $ (4,824) $(13,089) $(13,546)
-------- -------- -------- --------
Financing Activities:
Net Proceeds (Payments) Under Lines of Credit $ 6,700 $ 200 $ 23,000 $(11,400)
Payments of Debt (2,004) (1,910) (2,557) (2,478)
Purchase of Treasury Stock (723) (2,224) (12,739) (7,794)
Sale of Common Stock 676 829 1,255 1,868
-------- -------- -------- --------
Net Cash Provided by (Used in) Financing Activities $ 4,649 $ (3,105) $ 8,959 $(19,804)
-------- -------- -------- --------
Net Increase (Decrease) in Cash $ -- $ 1,023 $ (4,223) $ 1,760
Cash and Cash Equivalents at Beginning of Period -- 1,964 4,223 1,227
-------- -------- -------- --------
Cash and Cash Equivalents at End of Period $ -- $ 2,987 $ -- $ 2,987
======== ======== ======== ========
Supplemental Cash Flow Disclosures:
Notes Issued for Acquisitions $ 100 $ 600 $ 100 $ 600
Cash Portion of Acquisitions and Related Costs 176 922 176 922
-------- -------- -------- --------
Total Consideration Paid for Acquisitions $ 276 $ 1,522 $ 276 $ 1,522
======== ======== ======== ========
</TABLE>
The Changes in Assets and Liabilities for the three and nine months ended
November 30, 2000 and 1999, are net of assets and liabilities acquired.
The accompanying notes are an integral part of these statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MATERIAL SCIENCES CORPORATION
The data for the three and nine months ended November 30, 2000 and 1999 have not
been audited by independent public accountants but, in the opinion of Material
Sciences Corporation ("MSC" or "Company"), reflect all adjustments (consisting
of only normal, recurring adjustments) necessary for a fair presentation of the
information at those dates and for those periods. The financial information
contained in this report should be read in conjunction with the Company's 2000
Annual Report to Shareowners and Annual Report on Form 10-K. Certain prior year
amounts have been reclassified to conform with the fiscal 2001 presentation.
(1) During the nine months ended November 30, 2000 and 1999, the Company
derived approximately 11.5% and 13.1%, respectively, of its sales from fees
billed to Walbridge Coatings ("Partnership"), a partnership among
subsidiaries of MSC, Bethlehem Steel Corporation ("BSC") and LTV
Corporation ("LTV"), for operating the Walbridge, Ohio facility.
(2) Includes trade receivables due from the Partnership of $633 as of November
30, 2000 and $1,686 as of February 29, 2000. Trade receivables also include
amounts due from Innovative Specialty Films, LLC, a joint venture with
Bekaert Corporation, of $288 as of November 30, 2000 and $4 as of February
29, 2000.
(3) Preferred Stock, $1.00 Par Value; 10,000,000 Shares Authorized; 1,000,000
Designated Series B Junior Participating Preferred; None Issued.
(4) Common Stock, $.02 Par Value; 40,000,000 Shares Authorized; 17,670,086
Shares Issued and 14,285,650 Shares Outstanding as of November 30, 2000 and
17,343,858 Shares Issued and 15,186,310 Shares Outstanding as of February
29, 2000.
(5) Treasury Stock at Cost; 3,384,436 Shares as of November 30, 2000 and
2,157,548 Shares as of February 29, 2000. On September 23, 1999, MSC's
Board of Directors authorized the repurchase of up to one million shares of
the Company's common stock, of which 468,900 shares were purchased through
February 29, 2000. During the first six months of fiscal 2001, the Company
purchased the remaining 531,100 shares of this program at an average
purchase price of $10.30 per share.
On June 22, 2000, the Company's Board of Directors authorized a new program
to repurchase up to one million shares of the Company's common stock.
Repurchases will be made from time to time in the open market or through
privately negotiated purchases, as the Company may determine. For the third
quarter, 68,100 shares were purchased at an average purchase price of
$10.63 per share. As of January 11, 2001, 695,788 shares were purchased
under this new authorization at an average purchase price of $10.45 per
share. The Company is suspending its repurchases of stock until the
evaluation of strategic alternatives for Pinole Point Steel has been
concluded.
6
<PAGE>
(6) Comprehensive Income (Loss):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ --------------------
November 30, November 30,
------------------ --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) $(478) $4,564 $3,812 $13,032
Other Comprehensive Income:
Foreign Currency Translation
Adjustments (292) (134) (505) (59)
----- ------ ------ -------
Comprehensive Income (Loss) $(770) $4,430 $3,307 $12,973
===== ====== ====== =======
</TABLE>
(7) Business Segments:
The Company reports segment information based on how management
disaggregates its businesses for evaluating performance and making
operating decisions. Management is exploring strategic alternatives for its
hot-dip galvanizing operation ("Pinole Point Steel"), formerly included in
the Coated Products and Services segment, and therefore is disclosing
Pinole Point Steel as a separate segment. The Coated Products and Services
segment now includes the coil coating and electrogalvanizing product
groups. The Company's four segments are: Coated Products and Services,
Pinole Point Steel, Engineered Materials and Specialty Films. Corporate
represents unallocated general corporate expenses. Sales between segments
are recorded at market rates, and the related intercompany profit is
eliminated in consolidation. The net sales on a geographic basis are not
material. Information concerning the Company's business segments in the
third quarter and first nine months of fiscal 2001 and 2000 was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- --------------------
November 30, November 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales
---------
Coated Products and Services $ 49,920 $ 52,179 $148,391 $152,560
Pinole Point Steel 37,908 42,410 117,415 134,047
Engineered Materials 21,508 20,125 66,828 59,654
Specialty Films 12,042 11,397 45,952 38,458
Eliminations (1,261) (670) (3,614) (1,819)
-------- -------- -------- --------
$120,117 $125,441 $374,972 $382,900
======== ======== ======== ========
Income (Loss) Before Income Taxes
---------------------------------
Coated Products and Services $ 4,546 $ 5,783 $ 12,659 $ 15,975
Pinole Point Steel (3,907) 2,036 (6,456) 5,629
Engineered Materials 1,738 3,097 7,598 9,074
Specialty Films 1,996 1,352 8,020 5,453
Corporate and Eliminations (5,960) (5,024) (16,599) (15,445)
-------- -------- -------- --------
$ (1,587) $ 7,244 $ 5,222 $ 20,686
======== ======== ======== ========
</TABLE>
7
<PAGE>
(8) As previously reported, on April 9, 1997, a plaintiff claiming to represent
a class of MSC shareowners, who allegedly suffered injury from the
accounting irregularities announced on April 7, 1997, filed a complaint in
the United States District Court for the Northern District of Illinois. The
class purportedly includes shareowners who purchased MSC shares between
April 18, 1996 and April 7, 1997. The plaintiff claimed that the Company
and certain of its current and former officers violated the federal
securities laws and were aware of, or recklessly disregarded, material
misstatements that were made in MSC's publicly filed financial reports.
On May 26, 2000, the parties executed a settlement agreement. The Court
entered an order preliminarily approving the agreement on May 31, 2000 and
ordered that the class be advised of the proposed settlement. On August 1,
2000, the class members were afforded the opportunity to present any
objections at a fairness hearing, at which time the settlement was approved
with no objections, and the case was dismissed. The costs of the
settlement and related legal fees are expected to be covered under the
Company's insurance policies, net of retention (expensed in fiscal 1998).
(9) On December 29, 2000, LTV Steel Company, Inc. (and its subsidiary partner
in the Partnership) filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Sales to LTV through the Partnership were $8.9 million for
the nine months ended November 30, 2000. As of the date of LTV's filing,
LTV was obligated to the Partnership in the amount of approximately $1.9
million. The Partnership has considerable processed and unprocessed steel
coils of LTV in its possession and has asserted a lien to secure
outstanding receivables. Although the Company believes that LTV's
participation in the Partnership and the Partnership's processing services
for LTV are valuable to the LTV estate, there currently can be no assurance
that the LTV bankruptcy will not result in a disruption of such
relationships. As of January 11, 2001, the Partnership is continuing to
make shipments to LTV under special credit arrangements that are being
negotiated. In addition, other subsidiaries of the Company have pre-
petition receivables from LTV of $0.3 million.
(10) As of November 30, 2000, the Company was in compliance with its loan
covenants. The Company believes that it may be out of compliance with
certain covenants of its lines of credit as of February 28, 2001. The
Company is currently negotiating with its lenders and believes that
appropriate amendments or waivers, if necessary, will be obtained for the
fiscal year ending February 28, 2001. The Company believes that its cash
flow from operations, together with available financing and cash on hand,
will be sufficient to fund its working capital needs, capital expenditures,
acquisitions, and debt payments.
8
<PAGE>
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended November 30, 2000
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS
---------------------
Net sales in the third quarter of fiscal 2001 were $120,117, a 4.2% decrease
from $125,441 in the prior year's third quarter. For the nine-month period
ended November 30, 2000, net sales were $374,972 versus $382,900 last year, a
2.1% decrease. Gross profit margin for the third quarter was 15.1% as compared
with 20.5% in the same quarter last year. For the first nine months, gross
profit margin was 17.1% in fiscal 2001 versus 20.1% in fiscal 2000. The decrease
in gross profit margin was mainly due to continued higher steel costs at Pinole
Point Steel than could be recovered through price increases to customers, lower
sales volume at the galvanizing operations, as well as an increase in utility
costs for all segments. Selling, general and administrative ("SG&A") expenses
were 14.2% and 13.7% of net sales in the third quarter and first nine months of
fiscal 2001, respectively, as compared with 12.7% and 12.4% of net sales in the
same periods last year, respectively. The increase in SG&A percentage was due
mainly to continued higher research and development and marketing spending to
support new product and market initiatives for the Engineered Materials and
Specialty Films segments, partially offset by a litigation settlement within the
Specialty Films segment. SG&A expenses for the first nine months of fiscal 2000
included a pro rata portion of compensation expense totaling approximately
$1,300 associated with the Company's 1998 Long-Term Incentive/Leverage Stock
Awards Program. During the third quarter of fiscal 2001, income (loss) before
income taxes was a loss of $1,587 as compared with income of $7,244 last fiscal
year. For the nine months ended November 30, 2000, income before income taxes
decreased 74.8% to $5,222 from $20,686 in the prior year period. During the
third quarter, the Company reduced its effective income tax rate for fiscal 2001
from 37.0% to 27.0% due to lower than expected income before income taxes.
The Company expects to record a loss for the fourth quarter of fiscal 2001. MSC
anticipates continued softness in its businesses due to the slowing economy,
higher utility costs, and California energy curtailments to have a negative
impact in the near term, particularly at Pinole Point Steel.
Management is currently exploring strategic alternatives for its hot-dip
galvanizing operation ("Pinole Point Steel"), formerly included in the Coated
Products and Services segment, and therefore is disclosing Pinole Point Steel as
a separate segment. The Company's four principal business segments are Coated
Products and Services, Pinole Point Steel, Engineered Materials and Specialty
Films. The Coated Products and Services segment includes the coil coating and
electrogalvanizing product groups. This segment provides galvanized and
9
<PAGE>
prepainted products and services primarily to the building and construction,
automotive and appliance markets. The Pinole Point Steel segment includes the
hot-dip galvanizing product group. This segment provides galvanized and
prepainted product primarily to the building and construction market. The
Engineered Materials segment includes the laminates and composites product
group. This segment combines layers of metal and other materials designed to
meet specific customer requirements for the automotive, lighting, appliance and
computer disk drive markets. The Specialty Films segment provides solar control
and safety window film, as well as industrial films used in a variety of
products.
Coated Products and Services
Coated Products and Services' third quarter net sales decreased 4.3% to $49,920
from $52,179 in the same quarter last year. Net sales for Coated Products and
Services in the first nine months of fiscal 2001 decreased to $148,391, a 2.7%
decrease from $152,560 last fiscal year. Both periods were affected by a
decrease in electrogalvanizing demand for the automotive market. For the third
quarter, income before income taxes for Coated Products and Services decreased
to $4,546, a 21.4% decrease from $5,783 in the prior year. For the nine months
ended November 30, 2000, income before income taxes decreased 20.8% to $12,659
as compared with $15,975 for the same period last fiscal year. For both
periods, lower electrogalvanizing demand and higher utility costs were the
primary contributors to the decrease.
On July 23, 1999, a subsidiary of Bethlehem Steel Corporation ("BSC") sold a
portion of its ownership interest in Walbridge Coatings ("Partnership") to a
subsidiary of the LTV Corporation ("LTV"). LTV purchased a 16.5% equity
interest in the Partnership from BSC, providing LTV access to 33.0% of the
facility's available line time. This change in ownership provided MSC with a
more diversified customer base, as well as improved the likelihood of higher
facility utilization. In conjunction with the sale, the Partnership term was
extended from December 31, 2001 to December 31, 2004. The Company maintained
its 50% ownership interest in the Partnership. The Partnership also maintained
its long-term toll processing agreement with ISPAT Inland Inc. (a former
partner) which expires on December 31, 2001.
On December 29, 2000, LTV Steel Company, Inc. (and its subsidiary partner in the
Partnership) filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
Sales to LTV through the Partnership were $8.9 million for the nine months ended
November 30, 2000. As of the date of LTV's filing, LTV was obligated to the
Partnership in the amount of approximately $1.9 million. The Partnership has
considerable processed and unprocessed steel coils of LTV in its possession and
has asserted a lien to secure outstanding receivables. Although the Company
believes that LTV's participation in the Partnership and the Partnership's
processing services for LTV are valuable to the LTV estate, there currently can
be no assurance that the LTV bankruptcy will not result in a disruption of such
relationships. As of January 11, 2001, the Partnership is continuing to make
shipments to LTV under special credit arrangements that are being negotiated. In
addition, other subsidiaries of the Company have pre-petition receivables from
LTV of $0.3 million.
Pinole Point Steel
For the third quarter, net sales for Pinole Point Steel decreased to $37,908,
10.6% lower than $42,410 in the same quarter last year. For the nine-month
period ended November 30, 2000,
10
<PAGE>
net sales decreased 12.4% to $117,415 from $134,047 in the same period last
year. The decrease in sales for both periods is due mainly to lower demand in
the West Coast building and construction market and higher customer inventories.
Income (loss) before income taxes for the third quarter was a loss of $3,907
versus income of $2,036 in the same quarter last year. For the first nine months
of the fiscal year, income (loss) before income taxes was a loss of $6,456
versus income of $5,629 for the same period last year. Lower shipments of
galvanized material, higher material costs than could be recovered through price
increases to customers and higher utility costs were the main contributors to
the lower income before income taxes. The reduced margin between the cost of
steel and the price to customers is expected to have a negative impact on the
remainder of fiscal 2001.
Engineered Materials
Sales of Engineered Materials increased 6.9% to $21,508 for the third quarter of
fiscal 2001 as compared with $20,125 in the same quarter last fiscal year. For
the year-to-date period, Engineered Materials' net sales grew to $66,828, a
12.0% increase from $59,654 for the same period last year. Higher shipments of
Quiet Steel(R) to the automotive and electronics markets were the main
contributors to the growth, offset, to a degree, by lower shipments of disc
brake noise dampers. For the third quarter, income before income taxes was
$1,738 in fiscal 2001 versus $3,097 in fiscal 2000, a 43.9% decrease. Income
before income taxes declined 16.3% for the first nine months of fiscal 2001 to
$7,598 as compared with $9,074 for the same period last year. The decline for
both periods was mainly due to a less favorable product mix, inefficiencies
associated with the ramp-up of Quiet Steel(R) for automotive body panels and
planned higher research and development and marketing spending for new product
and market initiatives, both domestically and internationally.
During November 2000, a subsidiary of the Company signed a definitive agreement
with Tekno S.A., the leading coil coater in Brazil, to retrofit their existing
line with laminating technology for the purpose of manufacturing constrained
layer composites. This line, when installed, will produce Quiet Steel(R) and
disc brake noise damper material for sale and distribution to the South American
market.
During September 2000, a subsidiary of the Company signed a letter of intent to
acquire, Goldbach Automobil Consulting (GAC), a European brake damper
distributor and stamper. The transaction is expected to close in early fiscal
2002, subject to completion of due diligence and negotiation of definitive
agreements. The acquisition has been structured with an initial payment of
$6,732 or 15 million DEM at closing and potential contingent consideration based
upon an earnout. The Company has entered into a forward contract for 15 million
DEM to be executed on January 26, 2001.
Specialty Films
Third quarter Specialty Films' net sales increased 5.7% to $12,042 in fiscal
2001 as compared with $11,397 in the same quarter last year. Sales for the nine
months ended November 30, 2000, increased 19.5% to $45,952 as compared with
$38,458 in the prior fiscal year. Higher shipments of solar control window film
in the U.S. and internationally contributed to the increase. Income before
income taxes for the third quarter increased 47.6% to $1,996 as compared with
$1,352 last year. For the first nine months of fiscal 2001, income before
income taxes was $8,020, a 47.1% increase from $5,453 for the same period last
fiscal year. For both
11
<PAGE>
periods, the increase was due to higher sales volume, improved performance at
Innovative Specialty Films, LLC ("ISF"), the joint venture with Bekaert
Corporation, and a fiscal 2001 third quarter litigation settlement, offset
slightly by increased spending in research and development and marketing.
Total Other (Income) and Expense, Net and Income Taxes
Total other (income) and expense, net was expense of $2,666 in the third quarter
of fiscal 2001 as compared with $2,623 of expense for the third quarter of
fiscal 2000. For the year-to-date period, total other (income) and expense, net
was expense of $7,559 in fiscal 2001 as compared with $8,665 last year.
Interest expense, net increased $387 and $309 for the third quarter and first
nine months of fiscal 2001, respectively, as compared with the prior year. The
increase was mainly due to higher debt levels and slight increases in variable
interest rates. In addition, Equity in Results of Joint Ventures was expense of
$73 and $211 for the third quarter and first nine months of fiscal 2001,
respectively, and expense of $477 and $1,582 for the same periods last year,
respectively. The change is due to improved performance at ISF for both periods.
MSC reduced its effective income tax rate for fiscal 2001 from 37.0% to 27.0%
during the third quarter due to lower than expected income before income taxes.
MSC's effective income tax rate was 37.0% for the third quarter and first nine
months of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
During the third quarter of fiscal 2001, MSC utilized $1,141 of cash from
operating activities as compared with generating $8,952 in the third quarter
last year. The decrease in cash generation is due mainly to lower accounts
payable levels and a decrease in net income, offset slightly by lower inventory
and accounts receivable levels. For the nine months ended November 30, 2000,
MSC utilized $93 of cash from operating activities as compared with generating
$35,110 in the same period last year. The decrease in cash generation is due
mainly to higher inventory levels, a decrease in accounts payable and accrued
expenses and lower net income. Earnings before interest, taxes, depreciation and
amortization ("EBITDA") decreased to $8,529 and $35,273 for the third quarter
and first nine months of fiscal 2001, respectively, as compared with $16,747 and
$50,348 for the same periods last year, respectively. MSC's capital
expenditures during the third quarter and first nine months of fiscal 2001 were
$2,306 and $9,750, respectively, as compared with $3,415 and $11,289 in the same
periods last fiscal year.
MSC's total debt increased as of November 30, 2000, to $144,127 from $123,584 as
of February 29, 2000. As of November 30, 2000, the Company maintains a committed
line of credit totaling $90,000. There was $20,200 outstanding under this line
of credit as of November 30, 2000, versus no amount outstanding as of February
29, 2000. The Company has executed letters of credit totaling $4,740 against
these lines, leaving available lines of credit of $65,060 as of November 30,
2000, subject to certain loan covenants. The Company also maintains a $10,000
uncommitted line of credit. There was $10,000 outstanding under this line of
credit as of November 30, 2000 as compared with $7,200 as of fiscal year end. As
of November 30, 2000, the Company was in compliance with its loan covenants.
The Company believes that it may be out of compliance with certain covenants of
its lines of credit as of February 28, 2001. The Company is currently
negotiating with its lenders and believes that appropriate amendments or
waivers, if necessary, will be obtained for the fiscal year ending February 28,
2001. The Company believes that its cash flow from operations, together with
12
<PAGE>
available financing and cash on hand, will be sufficient to fund its working
capital needs, capital expenditures, acquisitions, and debt payments.
On September 23, 1999, MSC's Board of Directors authorized the repurchase of up
to one million shares of the Company's common stock, of which 468,900 shares
were purchased through February 29, 2000. During the first six months of fiscal
2001, the Company purchased the remaining 531,100 shares at an average purchase
price of $10.30 per share.
On June 22, 2000, MSC's Board of Directors authorized a new program to
repurchase up to one million shares of the Company's common stock. Repurchases
will be made from time to time in the open market or through privately
negotiated purchases, as the Company may determine. For the third quarter,
68,100 shares were purchased at an average purchase price of $10.63 per share.
As of January 11, 2001, 695,788 shares were purchased under this new
authorization at an average purchase price of $10.45 per share. The Company is
suspending its repurchases of stock until the evaluation of strategic
alternatives for Pinole Point Steel has been concluded.
The Company has a capital lease obligation, which was $1,596 as of November 30,
2000, relating to a facility that the Company subleases to the Partnership. In
addition, the Company is contingently responsible for 50% of ISF's financing
requirements. As of November 30, 2000, ISF's debt was zero as compared with $183
as of February 29, 2000.
As previously reported, on April 9, 1997, a plaintiff claiming to represent a
class of MSC shareowners, who allegedly suffered injury from the accounting
irregularities announced on April 7, 1997, filed a complaint in the United
States District Court for the Northern District of Illinois. The class
purportedly includes shareowners who purchased MSC shares between April 18, 1996
and April 7, 1997. The plaintiff claimed that the Company and certain of its
current and former officers violated the federal securities laws and were aware
of, or recklessly disregarded, material misstatements that were made in MSC's
publicly filed financial reports.
On May 26, 2000, the parties executed a settlement agreement. The Court entered
an order preliminarily approving the agreement on May 31, 2000 and ordered that
the class be advised of the proposed settlement. On August 1, 2000, the class
members were afforded the opportunity to present any objections at a fairness
hearing, at which time the settlement was approved with no objections, and the
case was dismissed. The costs of the settlement and related legal fees are
expected to be covered under the Company's insurance policies, net of retention
(expensed in fiscal 1998).
MSC continues to participate in the implementation of settlements with the
government for the clean-up of various Superfund sites. For additional
information, refer to MSC's Form 10-K for the fiscal year ended February 29,
2000.
Forward-looking statements contained in this filing are qualified by the
cautionary language described in Part II, Item 7 of the Company's 2000 Annual
Report on Form 10-K, filed with the SEC pursuant to the Securities Exchange Act
of 1934, as amended.
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MATERIAL SCIENCES CORPORATION
FORM 10-Q
For the Quarter Ended November 30, 2000
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a)27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter for which
this report is filed.
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Elk Grove Village, State of Illinois,
on the 11th day of January, 2001.
MATERIAL SCIENCES CORPORATION
By: /s/ Gerald G. Nadig
-------------------------------------
Gerald G. Nadig
Chairman, President
and Chief Executive Officer
By: /s/ James J. Waclawik, Sr.
--------------------------------
James J. Waclawik, Sr.
Vice President,
Chief Financial Officer
and Secretary
15
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MATERIAL SCIENCES CORPORATION
Quarterly Report on Form 10-Q
Index to Exhibits
Sequentially
Exhibit Number Description of Exhibit Numbered Page
-------------- ---------------------- -------------
27 Financial Data Schedule (1)
(1) Appears only in the electronic filing of this report with the Securities
and Exchange
Commission.
